Being sued after reporting to SOCA

There is an interesting legal case which has been rumbling around the courts for some years now - and looks likely to do so for a few years more.

The facts are pretty simple. A business customer of a bank instructed the bank to make payments to various persons overseas. (I am using "person" here to include a business as well as an individual.) The bank made a report to SOCA seeking consent to make those payments under the money laundering regime. Pending receipt of that consent the bank did not make the payments.

When the monies failed to arrive when they were due the persons to whom the payments should have been made got very concerned and lost faith in the bank's customer. As a result the bank's customer lost valuable opportunities and its reputation was damaged.

It is now accepted that the payments, had they been actioned on time, would not in fact have involved any money laundering.

The customer sued the bank for its loss.

What takes this out of the ordinary is the size of some of the numbers. The claim against the bank is for US $300 million in damages. Four payments were involved. The total value of them was about US $38 million.

Initially the bank responded to the claim for damages by saying, in effect, "We had a suspicion - the law required us to do what we did. So tough!".

The customer responded by saying, in effect, "There were no grounds for any suspicion - you ought not have had a suspicion - your failure to make the payments as instructed has cost us dear and you have to bear that cost."

When the matter first came to court the customer's claim was summarily thrown out (without full evidence being produced), on the basis that the customer could not tell the bank whether or not it "ought" to have had a suspicion - and therefore the claim was bound to fail and the court would not entertain it at all.

The customer appealed and had the claim re-instated on the basis that it was proper to oblige the bank to show in court at least that it actually did have a suspicion.

The bank has now disclosed its internal procedures for reporting suspicions and the bank's MLRO has personally made a witness statement saying that, on the information he received from more junior staff, he genuinely did have a suspicion. The bank has also said that the paperwork would have been through at least two other people on the way to the MLRO and they also must have had a suspicion or they would not have referred it up the 'chain of command' to the MLRO.

But the bank has refused to give the names of anyone involved at the bank other than that of the MLRO himself.

The customer says, in effect, "How can I check if these other people genuinely had a suspicion if I cannot get them into the witness box because I don't know who they are?"

So the latest round in court has been about the customer asking the bank to disclose the names of the staff involved - and the bank's refusal to do that.

The judge has ruled that the bank must disclose how many different individuals in the bank were involved and in which departments they worked but, for now at least, the bank is not obliged to disclose their names.

The point is that the bank's argument, in part, was that its suspicion was obviously in good faith because a number of different people shared it. So the bank has to disclose a bit more about how many people shared it in order to back that up.

In the latest judgment the judge is thinking aloud about the pro's and con's of requiring details to be produced in court about reports of money laundering suspicions.

If you are interested the judgment is online HERE. Not the easiest of reads, though!

I give instructions to my bank to make a payment. They don't make that payment. Pretty much clues me in that something is wrong. Under what circumstances is this sort of "tippng off" legally permissible?

It would appear that the crux of this case was the SOCA consent. If the transactions are accepted as not being money laundering, then presumably the bank would have been able to proceed if SOCA had granted consent in time. If the action against the bank fails, is there any reason why SOCA could not be pursued for failure to give consent in time?

As a slight digression, can you clarify what "public interest immunity" is in this context? The bank seems to be claiming this as a reason for not disclosing the names of the employees that had a suspicion. My understanding from the documentation is that full disclosure to ensure a fair trial is in the public interest, but the immunity part is when full disclosure would have some other harmful effect. In this case, the "other harmful effect" would appear to be concerns about those employees being threatened in some way. If it has been accepted that the claimant wasn't engaging in criminal activity, then surely it's wrong to effectively depict him as a violent criminal.

Knowing many people in the banks and the culture which exists, no-one takes a chance with anything out of the ordinary - they just report it up the chain and let someone else make the decision and take the risk. Those I know suggest it is more a case of the fear of getting it wrong rather than any real suspicion.

I don't know if things are changing though because I am aware of a few individuals/companies who have received a phone call from their bank in the past 6 months asking for some additional information on a particular transaction - one being a cash lodgement of just under £1000.

The original legislation on 'tipping off' in s333 PoCA 2002 was repealed and replaced in 2007. The new legislation is HERE.

As you can see under s333A it can be an offence to disclose to someone (outside your own organisation) that a Suspicious Activity Report has been made.

In this case the bank did not initially disclose that to their customer - they simply said that they were unable to proceed with the transaction at present. The customer of course guessed what was going on - but that's not 'tipping off'.

Subsequently the bank did disclose that the reason for the delay had been because they had been awaiting consent from SOCA. However it seems that by that stage there was no likelihood of the authorities conducting further investigations into the matter. Therefore the disclosure to the customer was not "likely to prejudice any investigation that might be conducted". So again there was no 'tipping off' offence.

I think the bank is being sued for breach of its contractual obligation to its customer to carry out the customer's instructions. There is no contract between the customer and SOCA so if the customer (or the bank) were to sue SOCA they would need to establish that SOCA owed them a duty of care and had failed in that duty (remember the snail in the ginger beer case from law studies?). PoCA in effect allows SOCA seven working days to give (or withhold) consent and I believe SOCA responded within that timescale. It would be difficult I think to make a successful claim against SOCA.

Your point on 'public interest immunity' is valid. But on the other hand if the courts ordered the bank in this instance to disclose the names of the people who initially reported the suspicion would that have the effect of inhibiting other bank employees from reporting their suspicions in future?

The court decided that the bank had "made out the proposition that its employees fall within a class to which public interest immunity attaches". So then the court had to consider whether in this particular case the interests of justice over-rode that immunity.

I had recent experience, which has some similairity (apart from the numbers involved!). My bank declined a transaction without telling me. It placed a stop on my debit card which I discovered only when paying for a meal at a local restaurant. I was naturually furious. I was directed to the bank's fraud department. I assured them the transaction was legitimate (they had not doubted me - they were protecting me, they said). I asked them to process the transaction. They did not. I discovered this 4 months later when the payee re-ivoiced me. I complained to the bank. They in turn blamed me, saying that had I checked my (quarterly) bank statements I would have noticed the transaction had not gone through. I duly referred my case to the Financial Services Ombudsman. I held that the bank's procedures were wrong; instead of cancelling the transaction the bank should have suspended it pending further authorisation. The Ombudsman said he had no power to order the bank to alter its procedures. At the same time the Ombudsman effectively criticised my lack of procedures (because I did not do a bank rec). It was down to me, the bank and the Ombudsman said, to know that I should have resubmitted the transaction once it been declined by the bank.

Also of relevance may be the Durant v FSA case of 2003 (Court of Appeal) where it was ruled that Durant had no right to his complaint file or to details of the consequent investigation conducted by his bank and the FSA. He was thus powerless to challenge the probity or correctmness of the investigations made into his complaint.

It would seem reasonable to allege that the government owes a duty of care to the electorate. The seven day response time for SOCA is laid down by the government. Such a delay could, as in this case, have a severe impact on business. Bit of a stretch but is suing the government for allowing such a problem to be written into law a possiblity. (Preumably not, even before taking into account that it wasn't the current government that instituted this legislation.)

I appreciate the need for protection of whistle-blowers, but it woudl be interesting to see how robust the protection from unfounded allegations is. As can be seen in this case, such allegations can have major repercussions. In this case the bank are being forced into a slightly more detailed disclosure. There also appears to be eveidence that a bank employee may have a grudge against the complainant, having been refused a substantial loan by him. Is it common for public interest immunity to be lifted when such suspicions need to be checked?

Ah, Donoghue v Stevenson. Almost as much fun as Carlill v Carbolic Smoke Ball Company. I do like the comment that there is no difference between rodents and gastropods under Scots law.

The issue is not whether there is proof of an offence. The bank now accept that the customer was not, in fact, committing an offence. But that doesn't matter. The bank say they had a suspicion. The customer, in effect, is saying "We don't believe you did have a suspicion".

If the bank can satisfy the court that they really did have a suspicion of money laundering then the bank win (even though it turned out there actually was no money laundering). The customer cannot (successfully) sue the bank for doing what it was required by law to do. (But of course if actually the bank did not have a suspicion then it was not required to seek consent from SOCA.)

I think making a report anonymously does meet your obligations - but you would need to keep a record of the report yourself so that if challenged you could prove you made one.

It may be difficult to remain anonymous if you report using the online report filing facility. (That's an IT question - not my province!).

Of course if your report says, "I have looked at my client's bank statements, tax returns and accounting records and I suspect that . . . " then someone might guess the source of the report!

My point is that what might be suspicious to a bank manager may not be suspicious to a judge or the client and given the penalties for non compliance one would always Err on the side of caution to protect ones own neck.

The only safe way will be to obtain evidence to prove you had a suspicion, which is not how the legislation is worded.

We as accountants are having to make judgement calls as to whether one ought to have had a suspicion.That may even be based on what the client looked like, his background, body language, culture ? (dangerous) or previous, when combined with the transaction, some of which you could not write down for fear of committing some other offence of discrimination.

Surely a defence of I thought the transaction was large or unusual should be enough.

A bank manager recently asked the client, "you have done much better this year. Have you been money laundering or something ?" Whether that was a joke or not we will never know particulary as the figures quoted were not those of the clients. I explained that he was probably trying to tick a box on his file having been trained that sudden increases in profit or sales must be money laundering when in fact for micro businesses this is quite normal along with sudden decreases.

What proof is there of grounds for a suspicion, either you had one or you didn't. Clearly there was a suspicion as a report was made and clearance sought, and that should be the end of it.

There is the possibility that the report of a 'suspicion' was made in bad faith by an employee who had an axe to grind against the bank's customer.

The judgment has this, "I am bound to note that, in the present case, one bank employee apparently asked to borrow $1.5 million from the [bank's customer], which loan was refused. With such large sums of money involved, bad faith cannot automatically be ruled out".

As things stand the customer does not know whether that employee was involved at all in the report of the suspicion which ultimately caused the customer so much grief.

On the basis that it is the MLRO's duty to report to SOCA if he has a suspicion then he has fulfilled his duty. If he had not made a report he could have faced a criminal prosecution and possible imprisonment.

We have it hammered home that it is not the MLRO's place to become a detective and investigate further. I would therefore say that the court should recognise this and as the MLRO had "developed" a suspicion the other bank officials testimonies are surely irrelevant.

It is also hammered home to employees that if they have a suspicion they must report it to the MLRO or they then face a possible prison sentence.

The system has therefore been set up on an "if in doubt... report" basis and this type of situation is bound to occur from time to time. Some people are naturally more suspicious/cynical than others.

This is a bit like telling someone who is lost and asking for directions that they shouldn't be lost.

It is interesting to consider how on another occasion the the flip side argument of "You were clearly not suspicious, but you should have been", might fit into this. I think we know the answer!

I hadn't actually read this post when I made mine. It does change things slightly but it is still the MLRO's neck on the block. If the MLRO had identified the employee's report as plain malicious then he should not have proceeded. If however, any suspicion remained then he did the right thing. That is a call for him and him alone.

As a side point, did the MLRO or the bank itself know about the loan refusal? What on earth was a bank employee doing trying to borrow $1.5m? Perhaps the employee needed to be reported as well! In the olden pre money laundering days bank employees had to get their employer's clearance for even small loans/business interests to avoid this type of conflict. I am guessing those days are over.

Who would be a MLRO?

1) Don't report and risk prison.

2) Do report (incorrectly) and risk being sued/losing the client.

3) Do report (correctly) and risk who knows what in reprisals from a possible drug dealing terrorist!

Speaking as someone who is allergic to violence (I break out in cuts and bruises) 2) actually looks the least painful.

A client paid his VAT bill by internet banking £18k. The money disappeared from his account several weeks later he received a call from HMRC debt management the money hadn't been received. Contacted his bank and the money reappearred on his bank account the following day. He contacted debt management and assurred them the money was on its way and checked with his bank everything was ok. Money disappeared from his account again call from debt management several days later it hadn't been received either it had to be paid immediatley or it would go to the insolvancy team for bankrupty. He sent a cheque by special delivery. The missing money eventually came back on his account. On meeting with his advisor at the bank he was told his money was held and then returned because of "money laundering" he was advised the only way round it the future was to break the payment into smaller amounts of £6k every day until it was paid. My clients nerves were completely shot, not sleeping, couldn't concentrate on running his business in case someone turned up a his house to seize goods. So there we have it money laundering through HMRC.